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Careful Bookkeeping Makes a Successful Small Business

Strategies for maintaining proper records to protect and grow your business

Efficient bookkeeping is important for entrepreneurs of any business, but it is particularly true for small business owners, who may be working with small profit margins and on a tight budget that can be easily derailed by minor miscalculations or unexpected costs. Making sure to keep all your business’s financial details in writing and up to date will allow you to accurately gauge its financial health and help you plan for the future — how much you can afford to spend, how much you have saved and what is in place to cover emergencies.

Set Goals for Major Expenses

If you plan ahead to set aside money to cover major expenses, such as purchasing new computers, you won’t have to scramble to find funds or take out a loan when you can no longer put off the purchase. Furthermore, if you have money saved, you won’t miss out on business opportunities if a good investment comes your way.

The absolute ideal is to plan large purchases three to five years in advance, but it’s a good start if you can manage at least a year. When you set your saving plan, make sure to consider the reoccurring slow and strong seasons that your business faces.

“You'll avoid taking money out of the company during the flush periods only to find yourself short in the slower months, when costly projects like upgrading computers or replacing factory components usually happen,” states Eileen P. Gunn from Entrepreneur.com.

Let a Credit Card Track Your Expenses

One easy way to track expenses is to use a business credit card instead of cash for small purchases that can be numerous and therefore hard to keep track of.

“If you always use your business credit card for business expenses, you’re less likely to pay cash at, say, Staples and lose the receipts, forfeiting tax-time write-offs. Pens and printer paper can add up,” states Gunn.

Substantiate Expenses for the IRS

Aside from keeping track of your expenses, it is important to substantiate those expenses on your tax record to make tax season run smoothly, gain the best deduction and protect your business in the event that it must undergo an audit. Saving receipts is important but not sufficient for fully flushed-out records. It is a great idea to maintain electronic calendar records that list the details of business travel, meetings or other events that match up with expenses you will claim deductions for. This is particularly important for red-flag items that the IRS keeps an eye out for, such as business travel, meals and home office expenses.

“Often on tax returns, those numbers are too round. No one drives exactly 5,000 miles for business in a year, so the IRS knows this is an estimate,” says accountant Raffaele Mari. “In an audit, if you can’t substantiate those numbers, the whole category [of write-offs] can get thrown out.”

Save Your Records

Once you’ve gathered the proper records for your taxes, make sure to save them properly so you won’t have to do all that work again. Tax expert and IRS enrolled agent Bonnie Lee cautions that business owners must save previous years’ “payroll files including timecards, payroll registers, copies of W2s and payroll tax returns.” She also reminds business owners to “bear in mind that the IRS requires that you hold on to these files for seven years.”

Pay Attention to Invoices

Cash flow maintenance is crucial for small business owners, who are typically working under a tight budget. Unpaid bills can harm your cash flow and compromise your ability to conduct other business and pay your own bills.

“Assign someone in your organizations to track your billing. Then put a process in place for issuing a second invoice, making a phone call and perhaps levying penalties such as extra fees at certain deadlines,” recommends Gunn. It is a good idea to have specific penalties in place for payments that are 30, 60 and 90 days late.

These guidelines are a great start toward maintaining tight records for your small business. Proper records enable you to see how your business is growing and where you need to cut back, and ensure that you have no issues when it comes to paying taxes.